Legislature(2013 - 2014)BARNES 124
04/02/2013 09:00 AM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
SB 21-OIL AND GAS PRODUCTION TAX
CO-CHAIR FEIGE announced that the only order of business is CS
FOR SENATE BILL NO. 21(FIN) am(efd fld), "An Act relating to the
interest rate applicable to certain amounts due for fees, taxes,
and payments made and property delivered to the Department of
Revenue; providing a tax credit against the corporation income
tax for qualified oil and gas service industry expenditures;
relating to the oil and gas production tax rate; relating to gas
used in the state; relating to monthly installment payments of
the oil and gas production tax; relating to oil and gas
production tax credits for certain losses and expenditures;
relating to oil and gas production tax credit certificates;
relating to nontransferable tax credits based on production;
relating to the oil and gas tax credit fund; relating to annual
statements by producers and explorers; establishing the Oil and
Gas Competitiveness Review Board; and making conforming
amendments." [Before the committee was the proposed committee
substitute, HCS CSSB 21, Version B, labeled 28-GS1647\B,
Nauman/Bullock, 3/29/13, adopted as the working document on
3/29/13.]
CO-CHAIR FEIGE resumed the taking of public testimony.
9:03:12 AM
ANDY ROGERS supported CSSB 21(FIN) am(efd fld), but expressed
his concern that the bill has been weakened during its movement
through the committee process. He said he hopes the final
compromise will be a bill that Alaska can survive and thrive
with. To only pull out progressivity and then move things
around such that there is still a punitively high total
government take is not enough. At the end of the day, the only
thing that really matters is the total government take number.
He acknowledged it will be painful to the state to reduce that
number and live within its means. He urged the small producer
tax credit be kept in the bill, saying it is only a small bit of
economic development that can be kept in the tax code and the
state wants small, young, hungry explorers and producers looking
at establishing themselves in Alaska.
9:05:17 AM
CO-CHAIR FEIGE, regarding Mr. Rogers' statement that government
take will still be too high, asked what amount is low enough.
MR. ROGERS replied that is the million dollar question and it is
legislators who are in the seats to make that call. The easy
answer is whatever number it takes to incentivize oil companies
of a variety of sizes and flavors to invest in Alaska over other
domestic and global opportunities. He suggested a comparison
can be made to other states and the world to see what would make
Alaska competitive with them, but said that right now Alaska is
not in the game with any of them.
CO-CHAIR FEIGE noted that is what the committee is doing.
9:06:32 AM
MICHAEL JESPERSON supported the committee's proposed substitute
(CS), but agreed the bill has been watered down and he would
like to see more incentive included for exploration and new
production. However, he continued, the current proposal is
better than anything seen over the last several years. When
today's decline in the Trans-Alaska Pipeline System (TAPS) is
compared to what was predicted when Alaska's Clear and Equitable
Share (ACES) was passed, the prediction was off by several
years. The bill needs to be passed so his children can have a
future. It will take three to four years before the state sees
more investment to make up for the revenues that are predicted
to be lost, but long term the incentives and reduced taxes will
put more oil in the pipeline, which will give the state more
money to spend over the long run.
9:08:05 AM
LAURIE FAGNANI said she is the owner of a small communications
firm in Anchorage. She employs two dozen full-time graphic
designers, web developers, and account planners, and she is
testifying today because her employees need her to advocate on
their behalf to secure Alaska's future. Since the start of oil
flowing in the pipeline, oil production levels have been
directly tied to good paying jobs in the oil and gas industry.
Similarly, almost all state revenues are tied to oil production.
She said her employees understand this connection and see that
their futures are tied to production levels in the pipeline.
One of many companies indirectly reliant on oil and gas industry
in Alaska, her company has a diverse portfolio in tourism,
mining, and health care. The decisions legislators make today
will impact the livelihood of the state as well as the future of
her employees and her ability to run a business. Regarding the
point of competitiveness, she explained she operates in a
competitive marketplace and every day she worries about her
competitiveness. If she is not competitive or if she senses she
is losing market share, she changes her strategy, maneuvering
herself into a more competitive position because that is how the
marketplace works. Sometimes, however, a client relationship is
about price; if they can get it less expensive someplace else
they are going to move their business. This is how the market
works and it is up to her to decide what business she wants to
go after, what business she wants to invest in, and what
business she wants to keep. Just like the legislature spending
royalty revenues generated by Alaska's legacy fields, she has
made commitments to her family and her employees that they can
count on her to fund their futures. Just like the state, it is
her responsibility to maneuver her company so that she remains
competitive and attractive to new clients and to attract new
investment from her existing clients. Clearly, Alaska has a
pricing problem. Changing how the state taxes the industry, and
especially how the state protects the small producers with
extending credits, is a step in the right direction to
increasing production and keeping Alaska competitive among a
global playing field. It is time to get Alaska back in the game
by changing ACES so Alaska can compete and win market share.
Alaska's future depends on action now.
9:11:11 AM
MARLEANNA HALL stated she has lived in Alaska all of her life,
has attended school in the state, and has a family and job in
Alaska. She was educated in the public schools in Nome and
Eagle River and received a bachelor's degree from the University
of Alaska Anchorage. Her son is now attending public school and
she hopes when he is her age that he will be able to find a
well-paying job in a good economy in Alaska. She urged passage
of the bill, ending progressivity and encouraging investment in
the future development of Alaska's natural resources. The bill
is a start, but more needs to done. Investment needs to be
increased in Alaska, keeping the doors open of locally owned
businesses. She offered her hope that the committee considers
the long term over the short term. She specifically thanked her
representative, Representative Hawker, and encouraged him to
vote in favor of the bill.
9:12:16 AM
REPRESENTATIVE HAWKER thanked Ms. Hall and assured her he has
been working on this issue for many years.
9:12:29 AM
KATI CAPOZZI said this is her third year in a row testifying
before the legislature advocating for meaningful changes to
Alaska's oil tax policies. When she first testified in favor of
oil tax reforms in March 2011, TAPS was running at about 636,000
barrels per day. When she testified before the Senate Resources
Standing Committee on February 21, 2013, TAPS was running at
580,000 barrels. When she testified before the Senate Finance
Committee on March 12, 2013, TAPS was at 568,000 barrels, and
yesterday it was 563,905 barrels. For nearly two years and
three legislative sessions, the legislature and public have
debated the merits of whether a tax reform is necessary and
poured over countless slides indicating Alaska does not compete.
The supply of oil in the pipeline has dropped by 72,000 barrels
per day. This is concerning because there is no reason why,
during historically high oil prices, Alaska should not also be
enjoying the increased investment that results in production.
Argument has been heard over the last several hearings that more
time is needed, but she thinks three legislative sessions is
quite a bit of time. The time for getting something meaningful
was a few years ago. Every person living in Alaska is in the
oil industry, she maintained, regardless of who the person works
for. Increased investment is needed for everyone.
9:14:12 AM
JOHN STURGEON offered his support for the bill and his agreement
with what has been said. He urged that meaningful tax reform be
passed so Alaska's economy can continue to grow.
9:15:14 AM
JIM SYKES testified he supports increased oil production, but
opposes the proposed committee substitute (CS). There are many
upsides for companies, but he agrees Alaska can incentivize some
of the smaller producers better. However, he sees some serious
downsides to the state. The current CS essentially guarantees
more corporate profits on top of already corporate profits and
investment level is insufficient now, so he does not see that
necessarily changing. More production is not necessarily going
to mean more revenue and tax breaks are not necessarily going to
mean more investment. It starts eliminating the downside price
risk at about $90, which, in his opinion does not pass the "red
face" test. It eliminates the upside price risk by almost
eliminating progressivity. It allows the use of the state's
money without requiring actual performance of new production.
It looks to him that it applies to the legacy fields, which are
already among the most profitable oil fields on the planet.
Alaska's legacy fields are the "ATM" that has leveled out the
ups and downs of other investments made by Alaska producers
elsewhere in the world. What does Alaska get out of it? It
gives out cash in advance, it risks negative cash flows
regardless of oil price, and it is unlikely to recoup the value
of the credits under almost any likely scenario. Net profits
will accrue to corporations and the state will essentially be
accepting an effective lower net take per barrel.
9:17:10 AM
MR. SYKES continued, saying much more needs to be done in
understanding exactly how this will work and what the state will
get out of it. While he agrees a long-term solution needs to be
made, this current CS is a strategy based on hope and that is
not a prudent strategy. Something he finds difficult to accept
in a prudent fiscal strategy is that the administration has had
five years to audit the current tax regime, but has not. Until
there is an audited tax regime, it is not a good idea to start
changing it. He offered his belief that the State of Alaska
cannot lower its taxes enough to take away another oil producing
region's production boom, any more than anyone took Alaska's
production boom in the late 1970s and early 1980s. Companies
will go to an area, especially where technology created the
boom, not any tax policy. Regarding the question of how schools
will be funded unless more oil production is stimulated, he
asked how will the state pay for schools, roads, bridges,
hydroelectric dams, and public safety when cash is taken
directly out of Alaska's cash reserve. It is just a hope that
some of it may be returned. Alaska finds itself in the same
place that Bob Bartlett warned about in 1955 - outside interests
are controlling the state's natural resources when they want to
develop them. Without any guarantees that tax breaks are going
to actually increase production or increase revenue, which is
two separate questions, it really is more about price. The
throughput scare being visited upon the state is really not an
issue. The committee needs to ask questions, such as finding
out the internal rates of return for the companies. Even if
confidentiality agreements must be signed to get the
information, legislators need to understand where the companies
are so it is understood what the state is going to do to benefit
and what the companies are going to do if they receive a break.
He said he will be forwarding materials to the committee.
9:20:08 AM
LISA HERBERT, Executive Director, Greater Fairbanks Chamber of
Commerce, noted the chamber represents over 700 businesses and
organizations throughout the Interior. The chamber's primary
purpose is business advocacy with the mission of promoting a
healthy economic environment for business as well as the
community at large. One of the chamber's top priorities is to
encourage increased oil production by encouraging the
legislature and the administration to establish competitive
investment opportunity through taxation and regulatory policies
that will facilitate additional oil exploration, development,
and increased production. The need exists now to take the steps
necessary to ensure the health and viability of TAPS. The
chamber supports the governor's four guiding principles for tax
reform. For the last three years, thousands of business owners,
employees, and residents have testified before the legislature,
or submitted comment cards, supporting reform of Alaska's oil
tax policy to make the state more competitive. The chamber
supports reform of oil taxes in a fair, meaningful way. Several
chamber members, such as Flowline Alaska, Airport Equipment
Rentals, Alyeska Pipeline Service Company, have been negatively
impacted by decreased oil throughput. These and other
businesses have had to lay off employees and scale back
operations. Fairbanks is the hub for work on the North Slope
and reforming oil taxes will regain Alaska's competitiveness.
She urged the committee to pass a bill that will result in
increased oil production and increased work on the North Slope.
The chamber is reviewing [Version B] and will continue to remain
engaged as the bill moves through the legislative process.
9:22:05 AM
REPRESENTATIVE TARR commented she thinks everyone would
characterize his or her position as wanting meaningful oil tax
reform. She asked whether Ms. Herbert thinks Version B is the
meaningful tax reform that is needed.
MS. HERBERT replied the chamber's natural resources committee is
meeting tomorrow morning, at which time its members will look at
Version B and respond to the committee.
9:23:31 AM
DANIEL DONKEL, Donkel Oil & Gas, LLC, noted he has 30 years of
involvement as an investor and founder of several oil companies
in Alaska. Due to illness, his testimony will be read by his
consulting geologist, David Gross, formerly of Chevron Alaska.
9:24:43 AM
DAVID GROSS, Consulting Geologist, provided the testimony of
Daniel Donkel, founder of Donkel Oil & Gas, LLC and Danco
Exploration, Inc. He read the testimony as follows:
My primary reason for being here today is to explain
what I believe is necessary for this legislature to do
if it wants to see those smaller companies whose
business is confined to exploration, production, and
sale of crude oil, companies commonly referred to as
independents, flourish in Alaska. I am in the
business of bringing such companies to Alaska and have
been for 30 years. For my business and the business
of those I bring to Alaska to be successful I believe,
no, I know, this legislature needs to do three things
that are not being considered in this bill. The
legislature should: 1) adopt a simple, easy-to-
explain 75 percent exploration production credit that
cannot be manipulated to exclude independents; 2)
while leaving a fixed royalty in place, provide a
seven-year exemption from taxes for all new production
outside the existing participating areas; 3) leave the
ACES tax, including its progressivity, as is for all
existing participating areas. I am going to share
some information with you that the majors do not want
you to know. By majors, I mean ... those fully
integrated companies that explore, drill, transport,
refine, and distribute refined products for wholesale
and retail.
9:26:44 AM
CO-CHAIR FEIGE interjected, saying the three-minute limit on
testimony is approaching and the committee is in receipt of Mr.
Donkel's five pages of written testimony, which has been
accepted [for the record].
MR. DONKEL requested Mr. Gross be allowed to continue, saying
this is one of the most important pieces of information the
State of Alaska has never heard because the existing
independents with investment in the ground will not tell the
legislature or the public in case of retaliation. The reason
for his testimony is so the public can hear what he has to say
after 30 years of investing in the state.
CO-CHAIR FEIGE stated Mr. Donkel's testimony is posted on the
legislature's website for access by the public.
9:29:30 AM
REPRESENTATIVE TARR requested Mr. Donkel to explain his
exploration credit idea.
MR. DONKEL responded that after listening to testimony by the
Department of Natural Resources and others, it is clear to him
that this bill simply strips ACES, gives all the money to the
majors, and annihilates the small independents, none of which
have been able to produce a profit in Alaska. For example,
Pioneer testified the other day that it has been in Alaska for
10 years without a profit. Brooks Range has been in Alaska
since 1999 without a profit, and Armstrong has not had a profit.
He said his proposed exploration credit of 75 percent is almost
equivalent to that seen in the Cook Inlet with the Cook Inlet
Recovery Act combined with ACES. It was announced today that
[indisc.] Energy was able to get $17 million in credits and that
has led to four wells in the Redoubt Shoal that the state almost
had abandoned two years in bankruptcy court. He maintained ACES
is working and suggested the [GVR] be undone and replaced with
the 20 percent credits that are being taken away. This way, the
state would continue to get the $1 billion a year, not the
majors, and a tax credit would be provided that is clear,
simple, and reliable and that can be monetized each year. As
the independents stated in their testimony, they will put this
money in the ground to get the state more production. If the
majors want to drill outside of participating areas in the
legacy fields or the producing units, they can, and [under his
proposal] they will get a seven-year tax holiday from ACES. He
maintained this would be the most single most important thing
the state could do.
9:32:25 AM
PAMELA BRODIE, spoke as follows:
If SB 21 would make the difference, leading the oil
industry to exploration and development they would not
otherwise pursue, it would be logical and rational ...
for them to guarantee such exploration. But they do
not. If they would pursue this exploration regardless
of the tax cut, it would be logical for them to lobby
for the tax cut and wait for it, which they do, but
also to give the state guarantees for future
exploration and development. But they do not. It
seems to me that only if they do not plan more
development anyway, is it logical for them to give the
state no guarantees. And this is what they are doing.
It is a frightening prospect that oil throughput is
declining and the oil industry is apparently
uninterested in more exploration regardless of tax
rates. But even more frightening would be for the
state to lower taxes to no purpose as the amount of
oil declines. Please vote no on SB 21 so the state
won't face double losses.
9:33:53 AM
LARRY SMITH stated he has been a builder around the Cook Inlet
area for the last 50 years. He said it is reasonable for
Alaskans to have differing views and letting everyone speak to
their own interests is how democracy works best. In listening
to various experts, he has chosen Jack Roderick as the expert to
listen to. He reminded members that Mr. Roderick advised that
the legislature get it in writing and that the eyes of the
nation are upon Alaska. Mr. Smith quoted a response from former
Alaska Governor Jay Hammond when asked how he would tax the oil
companies: "for every cent we could possibly get; after all,
just as it is the obligation of oil company CEOs to maximize
benefits for their shareholders, so it is the obligation of the
state CEO to do the same for his." He noted that when SB 21 was
on the Senate floor, Senator Gary Stevens offered an amendment
that would have sunsetted the law, giving the legislature
another chance to see if the oil industry actually had increased
production, but it failed by a narrow margin. He urged that the
House consider this same amendment. He recalled former Governor
Hammond's statement that the biggest mistake of his political
life was when he did not veto the elimination of the state
income tax and that it would have been better to suspend it.
Mr. Smith said he opposes the bill as written, but if it must be
passed that it incorporate a suspension of the ACES provisions
rather than eliminating them. This would allow the provisions
to be brought back more easily. He further reminded members
that in her inaugural address, former Governor Palin used a
statement made about mining by Bob Bartlett at the state
constitutional convention, but she applied it to the oil
industry - the days of robber barons in Alaska [are] dead.
9:37:37 AM
CO-CHAIR FEIGE closed public testimony after ascertaining no one
else wished to testify.
9:37:53 AM
CO-CHAIR FEIGE recessed the meeting until 2:00 p.m.
2:05:37 PM
CO-CHAIR FEIGE called the House Resources Standing Committee
meeting back to order. Representatives P. Wilson, Hawker,
Olson, Seaton, Saddler, and Feige were present at the call back
to order. Representatives Tarr, Tuck, and Johnson arrived after
the meeting was called back to order.
CO-CHAIR FEIGE stated the committee will next hear from the
administration and consultants regarding the provisions of the
proposed committee substitute, HCS CSSB 21, Version B [adopted
as the working document on 3/29/13].
2:06:10 PM
MICHAEL PAWLOWSKI, Oil & Gas Development Project Manager, Office
of the Commissioner, Department of Revenue (DOR), provided a
PowerPoint presentation entitled, "Preliminary Fiscal Impact HCS
CSSB21(RES)". He said he will review the 12 key provisions of
Version B, will describe the potential fiscal impacts of those
provisions based on the Fall 2012 Revenue Forecast, and will
review hypothetical additional production scenarios. He pointed
out that this presentation is a preliminary fiscal analysis, not
a fiscal note, and the presentation assumes an effective date of
1/1/2014 for the major provisions.
2:07:40 PM
MR. PAWLOWSKI addressed the first major provision in Version B,
page 28, line 8, which would repeal the progressive surcharge as
of 1/1/2014 that is found under AS 43.55.011(g) (slide 3).
Known as progressivity, this surcharge is the additional tax
that is added to the 25 percent base tax under the current tax
system [Alaska's Clear and Equitable Share (ACES)].
Progressivity increases the tax rate when the production tax
value is greater than $30 a barrel. The progressive surcharge
may add up to be 50 percent of the total tax rate at very high
prices, for a maximum tax rate of 75 percent. The fiscal impact
from eliminating this provision would vary by year depending
upon price, underlying spending, and production, [reducing state
revenue] by up to $1.8 billion per year under the Fall 2012
Revenue Forecast. He said slide 4 depicts the impact of the
progressive surcharge by showing the amount of 25 percent base
tax in red and the amount of expected progressivity in green.
He noted the figures depicted in this graph are before credits;
thus the graph shows the revenue that is generated but not the
revenue that is then paid out with the credit.
2:09:32 PM
MR. PAWLOWSKI discussed the second major provision in Version B,
page 5, line 7, which would increase the base production tax
rate from 25 percent under ACES to 35 percent (slide 5). A
higher base tax rate would increase revenue through the base tax
system and would provide greater protection to the state at
lower oil prices. The fiscal impact would vary by fiscal year,
with the increased base tax rate generating up to $1.1 billion
[more] under the Fall 2012 Revenue Forecast.
2:10:28 PM
MR. PAWLOWSKI reviewed the third major provision in Version B,
page 13, lines 3-5, which would put limitations on capital
credits found under AS 43.55.023(a) for qualified capital
expenditures on North Slope leases (slide 6). This provision
would remove the 20 percent capital credit for qualified
spending [for areas north of 68 degrees North latitude] after
1/1/2014. Capital credits under the current system are taken in
one of two ways: 1) as a liability against the company's tax
liability, or 2) refunded. For credits taken against the
company's tax liability, the state does not see actual revenues
expended out. There is a suite of credits that can be issued as
either a certificate that is transferred to another company or
turned into the state for a cash payment, those being the
credits that the state refunds to companies that have no tax
liability.
2:12:27 PM
MR. PAWLOWSKI displayed a chart depicting the estimated fiscal
impact for the proposed limitations on credits as compared to
the Fall 2012 Revenue Forecast (slide 7). He explained that the
first line in the chart depicts the impact for capital credits
that are taken against the tax liability. The effect of the
proposal would begin halfway through fiscal year 2014, with
fiscal year 2015 being the first full fiscal year of the effect.
For fiscal year 2015, the state would no longer have a $700
million obligation for the qualified capital credits that would
be taken against the tax liability of taxpayers. The state
would also see a reduction of $150 million in credits that would
need to be refunded to non-taxpayers, for a total fiscal impact
of an increase of about $850 million to the state.
2:13:47 PM
MR. PAWLOWSKI outlined the fourth major provision in Version B,
page 13, lines 10-13, which would retain and increase the net
operating loss carry forward credit for net losses from oil and
gas operations on the North Slope (slide 8). The credit would
be increased from 25 percent of those losses under ACES to 35
percent, and would be taken in one year as opposed to two. This
credit, found in AS 43.55.023(b), is targeted to companies that
do not currently have production and therefore no tax liability.
This 10 percent increase is needed to make the economics
equivalent for a company that does not have enough production to
write off expenses against. This credit is transferrable or can
be refunded by the state. The estimated revenue impact of this
10 percent increase in credit is a decrement of about $40
million per year above the amount forecasted under ACES.
2:15:24 PM
MR. PAWLOWSKI, responding to Representative Seaton, confirmed
that slide 7 depicts the impact of only the capital credit and
that the impact of $850 million for fiscal year 2015 is a
positive fiscal impact to the state. However, he continued, the
increase in the net loss carry forward credit would have a
negative fiscal impact to the state.
2:16:41 PM
MR. PAWLOWSKI turned to the fifth major provision in Version B,
page 24, beginning on line 20, which would establish the gross
value reduction (GVR), formerly known as the gross revenue
exclusion (GRE) (slide 9). He said this provision would amend
AS 43.55.160 by adding a new subsection that would provide an
additional incentive for "new" oil. The change in Version B
from CSSB 21(FIN) am(efd fld) is a limitation on where this
incentive could apply. The qualifying production would be any
of the following three things: 1) Land that was not in a unit
on 1/1/2003; 2) Was not produced within a participating area
(PA) established after 12/31/2011 in a unit formed before
1/1/2003; and 3) Acreage that was added to an existing PA [after
12/31/12]. Regarding the third qualification, he reminded
members that the Department of Natural Resources had previously
discussed that the new participating areas within the existing
units are geologically distinct and provable accumulations of
oil. Compared to CSSB 21(FIN) am(efd fld), Version B would
provide a much more narrowly defined suite of oil that qualifies
for the GVR/GRE. The fiscal impact is indeterminate, but would
be under $50 million per year under the Fall 2012 Revenue
Forecast.
2:18:42 PM
MR. PAWLOWSKI, responding to Representative P. Wilson, confirmed
that the metering requirement [under CSSB 21(FIN) am(efd fld)]
was removed in Version B.
2:19:03 PM
REPRESENTATIVE SEATON understood the acreage is the physical,
top side acreage of a PA that is physically expanded, but that
it does not include reservoirs underneath existing PAs.
MR. PAWLOWSKI deferred to the Department of Natural Resources
deputy commissioner.
JOE BALASH, Deputy Commissioner, Office of the Commissioner,
Department of Natural Resources (DNR), replied the term acreage
is used because, by definition, a PA is the same reservoir. So,
when discussing property, it is the acreage that is being talked
about - the same leases in the same unit - more of the acreage
in that unit is going to become part of the PA.
2:20:22 PM
REPRESENTATIVE SEATON related his understanding that different
reservoirs that are not in communication could all be stacked
up. He asked whether it is the surface acreage that is being
talked about or whether the acreage is the volume of a PA that
might be two or three balloons down.
MR. BALASH responded acreage is just a reference to something
additional with regard to the land. It is three dimensions, not
just the two dimensions of the outlines on the surface - it
actually goes down into depth. When a PA is formed it is
identified geologically at both the horizontal level as well as
the vertical level. So, it is any additions to that PA that
might be an extension of the same reservoir. Twenty years ago a
given PA was drawn with current technology in mind; a company
may now be able to access additional portions of that same
reservoir, and because it is the same reservoir it is an
expansion of the original PA or an existing PA. Just because a
PA is expanded does not mean it will automatically qualify for
the GVR because the company will have to count the barrels
produced from that expansion in order to satisfy the Department
of Revenue and qualify for the GVR.
MR. PAWLOWSKI added the key is that in CSSB 21(FIN) am(efd fld)
it was going into an existing reservoir and trying to delineate
and define new pockets of oil within that existing reservoir.
It is the expansion of adding those new reserves that are not
currently within the allowable area that is the difference
between CSSB 21(FIN) am(efd fld) and Version B.
2:23:33 PM
MR. PAWLOWSKI moved to the sixth major provision of Version B,
page 12, line 16, and page 13, line 19, which would eliminate
the requirement that credits be taken over two years, instead
allowing them to be taken in one year (slide 10). Currently,
capital credits and net operating loss credits incurred on the
North Slope must be split into two certificates and taken over
two years. A company qualifies for a credit based on 20 percent
of its spending or 25 percent of its loss carry forward and DOR
issues the company two certificates; the impact of that credit
benefit is therefore divided over two years. This proposed
provision would particularly benefit the small producers that
have testified before the committee about the importance of
credits to their cash flow. Being able to get that credit in a
single year does not really have a fiscal impact on the state
given that obligation exists since the credit has been issued;
DOR would issue one certificate rather than two. The fiscal
impact would be substantial in fiscal year 2014 because the $400
million obligation for qualified capital expenditure credit from
expenditures that happened in calendar year 2013 would be closed
out in one year rather than spread over two years.
2:25:44 PM
CO-CHAIR SADDLER returned to the provision for the third
category of GVR. The oil and gas produced from acreage added to
an existing PA is clear, he said, but the concomitant obligation
is that the producer demonstrates to the department. He
inquired how easy that demonstration is and how easy will it be
for the Department of Natural Resources (DNR) to make that
determination.
MR. PAWLOWSKI answered that the language, "demonstrates to the
department", on page 24, line 30, is a "small d" and in that
reference is referring to the Department of Revenue. He said it
goes back to the previously discussed issue of demonstrating
where oil comes from. When the oil is coming from a lease or
acreage that is delineated in that expansion, saying it is easy
is an overstatement, but saying it is doable is a reasonable
statement. The important tension is the balance of the GVR and
the sliding scale per barrel credit, an either/or situation in
Version B - the GVR is a lesser incentive that is given for
those areas that do not want to go through this hoop. Under
CSSB 21(FIN) am(efd fld), the demonstration was required on a
well-by-well basis, but under Version B the demonstration can be
done on a pad level or a large development level, which is
easier to do than a well-by-well level. On a large drilling pad
with 20-40 wells, the ability to aggregate those wells together
and measure from that point becomes much easier in application
than it does on the well-by-well basis.
2:27:55 PM
CO-CHAIR SADDLER observed the language on [page 24, line 22]
that states "one or more of the following". He surmised the
first criterion is real easy, the second criterion is fairly
easily, and the third is not easy but doable. He asked what the
process would be for demonstrating to the Department of Revenue.
MR. PAWLOWSKI replied DOR would be looking for "the similar
metering concepts" and by working through the regulatory process
DOR would talk with industry about how DOR is going to measure
that. Currently, production is allocated back to acreage and
the technical aspects of how DOR would measure it. It is
difficult to say in specificity what the burden of that actual
measurement would be because of the nature of what that
expansion might look like. It would probably be very difficult
to measure from a narrow expansion of a participating area that
has very limited infrastructure, something this provision is not
designed for. This provision is designed more for the larger
expansions of adding new areas that are bringing new production
into the participating area where there are large pieces of
infrastructure and where the amount of infrastructure needed to
actually do counting can be justified.
CO-CHAIR SADDLER therefore understood it would be based on
metering and then allocating back.
2:29:32 PM
REPRESENTATIVE SEATON inquired how typical enhanced oil recovery
projects that increase volume will fit into this and asked how
that will be measured.
MR. PAWLOWSKI offered his understanding that the typical
enhanced oil recovery project would not fall under any one of
these three areas because the producer is extracting more oil
from the existing participating area, not actually adding
acreage and making the PA bigger. The point in previous bill
versions was to provide this significant incentive to
geologically defined new oil that could be quantified, looked
at, and expanded; it is a narrower benefit, but given the
substantiveness of the benefit that threshold is a fairly
limited one.
2:30:49 PM
MR. PAWLOWSKI resumed his discussion of the provision that would
eliminate the requirement that credits be taken over two years
(slide 10), saying this liability to the state would be closed
out in fiscal year 2014. For the credits that are taken against
a tax liability, the projected revenue impact is $250 million.
For the operating budget, the projected revenue impact is $150
million - the operating budget is additional appropriations to
the credit fund to pay for the small companies that turn their
certificates into the state for reimbursement. He reiterated
that these are credits earned before the bill goes into effect
on 1/1/2014, based on projected spending in calendar year 2013.
2:31:48 PM
REPRESENTATIVE SEATON recalled a previous discussion about the
forward funding of projects, noting that the credit is earned
when the capital is expended, not when the project is actually
undertaken. He asked whether Version B includes any controls on
frontloading expenses in 2013 to qualify for the credit.
MR. PAWLOWSKI deferred to a DOR audit master for an answer.
LENNIE DEES, Audit Master, Production Audit Group, Tax Division,
Department of Revenue (DOR), answered that DOR depends on
accounting rules that would prevent the frontloading of
expenditures from happening. Normally, when a company spends
money upfront for a project, that cost is not going to be
classified as a capital expenditure at the time the money is
spent. More often, work is done before money is spent. Very
rarely has he seen frontloading of capital projects. However,
if a company did spend a lot of money like that, the cost would
be classified on the balance sheet in some type of prepaid
account, which would not qualify it as a capital expenditure.
In DOR's reviewing of the requests and applications for
qualified capital expenditure credit claims, DOR would not allow
money spent in advance of work being done on capital projects to
be qualified as a capital expenditure eligible for the credit.
2:34:33 PM
REPRESENTATIVE SEATON posed a scenario in which a company plans
to replace 20 miles of pipeline, gets an engineering estimate,
pays that upfront, and then the work is done. He surmised that
DOR would, in this case, disqualify that as a capital
expenditure at the time.
MR. DEES replied correct. He posed an example of a company that
knows it is going to have a drilling program and wants to buy a
lot of pipe upfront and warehouse it. As the company purchases
the pipe, it would inventory the pipe, but at that point it
would not be classified as a capital expenditure. Only when the
pipe actually gets delivered to the project and is charged to
the particular well, or in the case of a pipeline, to the
pipeline, would it be classified as a capital expenditure. So,
if a company were to do something like that at the end of 2013
it would not be classified as capital until 2014, and at that
point it would not qualify for a credit because DOR would
consider the capital expenditure in 2014 and at that point it
would be too late to get the capital credit.
2:36:21 PM
REPRESENTATIVE SEATON clarified he is not talking about the
company itself buying pipe and warehousing it, but rather the
company hiring a construction company to do something. He said
these parameters need to be made clear on the record. He
surmised that if a company pays a construction company upfront
to replace 20 miles of pipeline that that would not qualify as a
capital expenditure until the construction company had put in
the pipeline.
MR. DEES confirmed that that is exactly what he is saying. As
the work is performed the project will get charged for that
particular piece of work and at that point it would become part
of the capital project. Prior to then, if it was paid up front,
it would be in some type of prepaid account.
2:37:31 PM
REPRESENTATIVE P. WILSON, drawing attention to the last bullet
on slide 10, surmised the $250 million in revenue impact would
be a minus impact, as would the $150 million in operating budget
impact.
MR. PAWLOWSKI responded correct, saying the $150 million would
be a minus because it would be an additional appropriation to
the credit fund through the operating budget to fulfill the
obligation of those credits.
2:38:12 PM
REPRESENTATIVE SEATON, noting the state is currently in deficit
spending, inquired what the rational is for changing from two
years to one when the people making the capital investment did
so knowing that it would be in two years.
MR. PAWLOWSKI answered the policy call was a balance between two
things. First, it was recognizing that the program is ending
and some companies might have made plans around those capital
expenditures and getting credits for them. Allowing it to be
taken in one year would benefit those companies that were making
the investments. Second, the state is going to have to pay its
credit obligation one way or another. Pushing that additional
money off into 2015 would spread the fiscal impact of the bill
out farther, but it would increase the fiscal note in fiscal
year 2015. There was a concern of pushing that fiscal
obligation off into the future rather than recognizing it today
and closing out the program.
2:39:47 PM
CO-CHAIR SADDLER understood the two years or one year is a wash.
However, he said he thinks the intent of Representative Seaton's
question is whether there is a big risk that there will be a lot
of frontend loading to take advantage of that capital credit
before the end of 2014.
MR. PAWLOWSKI replied that is one of the key reasons the
effective date needs to be as soon as it is in the bill, which
is 1/1/2014. It is already going into April 2013 and the
administration worried that pushing an effective date out into
the future would allow for that type of planning to ramp up.
While there might be some, the ability of companies to react
before January of this year is relatively limited.
CO-CHAIR SADDLER understood, then, that waiting another year or
two would be a risk, but waiting the seven months left in this
year would not be as big a risk.
2:40:57 PM
MR. PAWLOWSKI resumed his presentation, addressing the seventh
major provision in Version B, page 2, line 8, which would change
the funding source for community revenue sharing (slide 11). As
introduced by the administration, SB 21 recognized the soft
dedication of funds from the corporate income tax to the
community revenue sharing fund. Funds are still subject to
legislative appropriation. The language in Version B recognizes
that rather than softly dedicating revenue from the progressive
surcharge, revenue is softly dedicated from the corporate income
tax that is received under AS 43.20. The appropriation
guidelines have not changed, it is still $60 million or the
amount necessary to bring the community revenue sharing fund up
to $180 million. Acknowledging that members had asked about the
other credits and the work against the corporate income tax, he
pointed out that the corporate income tax has exceeded $500
million every year for the last 8 years. The $60 million is in
recognition of the importance of community revenue sharing and
the connection of that broader base of economic activity to
support it. He noted that this provision is a major change from
CSSB 21(FIN) am(efd fld).
2:42:40 PM
MR. PAWLOWSKI discussed the eighth major provision of Version B,
page 16, line 7, which would establish a per oil barrel tax
credit (slide 12). Under CSSB 21(FIN) am(efd fld), this credit
was a flat $5 per barrel, but under Version B this is expanded
with the addition of a new subsection on page 16, line 14. For
each taxable barrel that does not meet any of the three criteria
for the GVR in AS 43.55.160(f), there would be a sliding scale
per barrel credit, as opposed to the fixed $5 per barrel credit.
As seen on page 16, beginning on line 21, below $80 per barrel
gross value at the point of production, the credit would be $8
per taxable barrel. Between $80 and $90 gross value at the
point of production, the credit would be $7 for each taxable
barrel, sliding down to a credit of $0 if the average gross
value at the point of production for the month is greater than
or equal to $150 a barrel.
2:44:40 PM
MR. PAWLOWSKI then reviewed the estimated fiscal impact for the
aforementioned credits, noting that the numbers on the chart on
slide 13 are decrements in revenue. He reminded members that
fiscal year 2014 is for half a fiscal year because the bill's
effective date is 1/1/2014 and fiscal years are June 30 through
July 1. Fiscal year 2015 is the first full year of impact
[minus $825 million]. The value of the impact declines [with
each subsequent year, going down to minus $675 in fiscal year
2019] because the forecast is for declining production and the
credit is linked directly to production since it is a credit per
taxable barrel.
2:45:22 PM
REPRESENTATIVE SEATON surmised much of the estimate of revenue
is for an Alaska North Slope (ANS) West Coast price range of
$110, which, at a transportation cost of $10 would be a gross
value at the point of production of less than $100, and
therefore most of the oil would be at a credit of $6, $7, or $8.
While he understood tapering off to a slight progressivity at
higher prices, he said this proposal seems to be a fairly
dramatic reverse progressivity below $110. He requested an
explanation for the "hit on the state" at lower prices when the
state will have less revenue and higher deficits.
MR. PAWLOWSKI responded that, as a policy call, the concept is
first tied directly to production. Second, when going from $5
to $8 versus from $5 to $0, there is actually more on the state
side going up than there is going down, so there is a balance
between the upside and the downside that is being considered.
Another important point is on page 16, line 18: "A tax credit
under this section may not reduce a producer's tax liability for
a calendar year ... below zero." These are nontransferable,
use-it-or-lose-it credits. So, unlike the capital credit which
is based on spending, there could be a situation where
production is interrupted or production has declined and
spending is happening and there is a different relationship
directly to the state. Under this, the credit is linked
directly to production, so the less production the less revenue
to the state but also the less credits received by the company.
As the presentation continues, the committee will be able to
look at the balance between what the state's exposure at the low
side is versus how much additional revenue the state is taking
at the high side. At the end of the day it is a policy call and
a balance that legislators need to consider.
2:48:41 PM
REPRESENTATIVE SEATON expressed his concern that the $8 credit
is not only at $80 a barrel, but everything below $80 a barrel;
thus, it becomes a much higher and higher proportion of the
profitable income that is going to be excluded if there is time
of low oil prices. For example, if $8 is excluded at a price of
$45 a barrel, and $26 is subtracted for costs, a very large
portion of the profit is going to be excluded from taxation.
2:49:25 PM
MR. PAWLOWSKI outlined the ninth major provision of Version B,
page 3, line 17, a provision unchanged from CSSB 21(FIN) am(efd
fld) which would create a service industry expenditures credit
(slide 14). This credit is limited specifically to taxpayers,
specifically for work that is done within the state of Alaska.
It is non-transferrable, but can be carried forward against a
taxpayer's liability. It is a benefit given industry doing
additional work in-state for manufacturing or modification of
oil and gas equipment and is only for the portion spent in the
state. The fiscal note is indeterminate, but [is estimated] to
be less than $25 million a year.
2:50:24 PM
REPRESENTATIVE SEATON said this provision concerns him for the
ancillary treatment that it has. Alaska has education tax
credits - 50 percent tax credit from corporate income tax for
education and workforce training up to $100,000, then 100
percent tax credit for the next $100,000, and then up to 50
percent credit for up to $5 million. The total corporate tax
paid per year for this sector is about $10 million. He presumed
everyone in this service sector is going to qualify for some
credit. For this entire sector the effect of education or
workforce development tax credits will be zeroed out because all
the tax liability from corporations is being removed, as is the
incentive to use the tax credit for workforce development,
educational institutions, and processing technology facilities.
He inquired whether this has been considered or whether it is a
discussion the committee needs to have.
MR. PAWLOWSKI answered it has not been a detailed discussion
central to this particular section. He drew attention to page
4, lines 1-3, of Version B, noting it attempts to narrow the
provision to limit the double-qualifying of expenditures for
different credits. Thus, companies will still need to consider
which credit is actually the most beneficial to them. While the
education type credits might be more beneficial to a company,
the company will be unable to do both on the same expenditure.
So, there has been a fair conversation, but not one that, to
this point, has been a detailed conversation, other than to say
that the concern of the committee in the other body was to avoid
double dipping and double qualifying for multiple credits.
2:52:55 PM
CO-CHAIR FEIGE understood Representative Seaton to have said
that the maximum corporate tax revenue to the state from this
particular sector totals $10 million.
REPRESENTATIVE SEATON confirmed $10 million is about what it has
been. Information from Legislative Legal and Research Services
is that about $93 million in taxes is paid by corporations other
than oil and gas corporations and this sector represents about
10 percent of that. In no year has this sector paid more than
$10 million. Thus, the $25 million per year is probably high.
2:53:45 PM
CO-CHAIR FEIGE countered that one could also look at this and
say that if these incentives work as believed they will, then
the demand on this particular service industry could
significantly increase and the state could make up far more tax
revenue simply by growing the pie than the 10 percent credit
would cost.
REPRESENTATIVE SEATON said this is probably not possible because
this credit is $10 million per company or 10 percent of a
company's full expenditures and the credit can be carried
forward for five years. The concern is not double dipping, but
elimination of the corporate income tax as a source that the
state has established for educational tax credits means there
will be no source for educational tax credits. The state has
built in a pretty strong incentive to have corporations make
educational donations and workforce development and this credit
will take away all of that incentive because it will likely zero
out the corporate income tax for this entire sector, especially
since the credit can be carried forward five years. Since the
committee is looking at workforce development, the committee
should look at whether this provision is really beneficial and
whether it will bring a lot more work to the state. For
example, all of the pipes that are welded on the North Slope are
done in the state.
2:56:15 PM
CO-CHAIR FEIGE said he will need to look at the statutes on the
educational credits, but recalled that the educational credits
are written off against production tax.
MR. PAWLOWSKI pointed out that the education credit is found in
the corporate income tax, the production tax under AS 43.55.019,
and the property tax under AS 43.56.018. Thus, there are three
duplicate education credits touching three different pools of
taxes. If one is diminished, there will be revenues available
from the others.
CO-CHAIR FEIGE stated it is worth looking at, but will deserve a
lot more development.
2:57:12 PM
MR. PAWLOWSKI, responding to Representative P. Wilson,
reiterated the statute numbers and said the language is similar
in each one.
REPRESENTATIVE SEATON pointed out that those companies paying
production tax are not the companies that are targeted in this
provision for the service industry.
CO-CHAIR FEIGE responded education is [the target].
2:57:51 PM
MR. PAWLOWSKI addressed the tenth major provision of Version B,
page 2, line 18, a provision unchanged from CSSB 21(FIN) am(efd
fld) which would adjust the interest rate on delinquent taxes
(slide 15). He reminded members that this provision applies in
both directions - when there is an overpayment and the state
must reimburse the taxpayer and when there is an underpayment
and the taxpayer must pay the difference to the state. Multiple
sections throughout the bill are related to this interest rate
provision. Under current law the interest rate is the higher of
11 percent or 5 percentage points above the annual rate of
interest charged by the [12th Federal Reserve District]. Under
Version B the interest rate would be 3 percentage points above
the annual rate of interest charged by the [12th Federal Reserve
District]. The fiscal impacts include $100,000 in the fiscal
note for operations needed at DOR to reprogram its systems. The
fiscal impact is estimated to be up to [minus] $25 million per
year, increasing over time as more delinquent taxes are
calculated under the new interest rates of this provision.
2:59:18 PM
MR. PAWLOWSKI reviewed the eleventh major provision, a provision
that was added in Version B on page 18, lines 2, 20, and 21,
which would remove the requirement that a well be three miles
from an existing well to qualify for the Middle Earth frontier
basin credit (slide 16). It could potentially increase costs of
operations to the state in that the state is paying 80 percent
through this credit. Anything that can be done to make it as
efficient as possible would be a benefit to the activity. This
credit cannot be taken along with net operating loss carry
forward credit. The fiscal impact is already accounted for in
the Fall 2012 Revenue Forecast, so there is no addition to the
fiscal note. Responding to Co-Chair Feige, he clarified this
credit is transferable and refundable.
3:00:42 PM
MR. PAWLOWSKI, responding to Representative Seaton, confirmed
that the frontier basin credit has a limit of four wells, and
added that the reference can be found in Version Bon page 18,
line 7: "The persons that drill the first four exploration
wells in the state ...."
3:01:01 PM
MR. PAWLOWSKI outlined the twelfth major provision of Version B,
page 25, beginning on line 24, which would establish the Oil and
Gas Competitiveness Review Board, and is a provision that is not
modified substantially from that in CSSB 21(FIN) am(efd fld).
He explained this would be a new state board located within DOR.
Its nine members would be tasked with meeting once a year to
provide an institutional warehouse for an understanding of
Alaska's competitive position and to provide a report to the
legislature [every four years - see timestamp 3:19:57 p.m.] on
proposed changes to the fiscal system. The estimated fiscal
impact of $180,000 per year, which represents costs for travel
and use of existing staff, is not included in the tax fiscal
note, but in a separate fiscal note. A majority of the fiscal
impact is already included in the operating budget because DOR
is not adding new positions in the fiscal note to undertake this
work, but rather is absorbing the work in-house.
3:02:22 PM
MR. PAWLOWSKI explained the chart on slide 18 incorporates all
of the provisions in Version B to estimate the general fiscal
impact [as compared to the Fall 2012 Revenue Forecast]. He
reviewed the fiscal impacts for fiscal year 2015, the first full
fiscal year after the bill's effective date: Eliminating the
progressive tax would decrease state revenue by $1.5 billion;
raising the [base] tax rate from 25 percent to 35 percent would
increase state revenue by $1.075 billion; limiting credits for
qualified capital expenditures on the North Slope would increase
state revenue by $700 million; increasing the net operating loss
carry forward credit to 35 percent would result in a revenue
impact [of minus $40 million]; adding the gross value reduction
(GVR) for oil production in new units and new or expanded
participating areas would reduce state revenue by $25 million;
eliminating the provision that credits must be taken over a
period of two years will have no fiscal impact because that
program will be over in fiscal year 2014; amending the community
revenue sharing fund would have no fiscal impact; adding the
credit of $5 per taxable barrel and sliding scale credit per
taxable barrel would decrease state revenue by $825 million;
adding the credit for qualified oil and gas industry expenditure
is indeterminate but would possibly decrease state revenue by up
to $25 million annually; reducing the interest rate is
indeterminate but would possibly decrease state revenue by up to
$25 million annually; and removing the three-mile limitation for
the frontier basin credit would have no fiscal impact. The
total revenue impact for fiscal year 2015 would be a decrease of
$575 million to $625 million.
3:04:57 PM
MR. PAWLOWSKI then reviewed the revenue impact on the operating
budget for fiscal year 2015. He explained there would be an
additional $150 million to the state because there would be less
credits on the qualified capital expenditure credit that the
state would have to pay out. The increase in the net operating
loss carry forward credit would be a reduction of $40 million.
Therefore, the total fiscal impact, which includes changes in
revenue and appropriations that have to be made through the
operating budget to pay for the credits, is a reduction in state
revenues and expenditures of $465 million to $515 million for
fiscal year 2015.
3:06:01 PM
MR. PAWLOWSKI, responding to Co-Chair Saddler, clarified that
the per-taxable-barrel credit is an either/or credit. He
explained the $5 per barrel credit would also qualify for the
GVR/GRE, and the sliding scale credit would be for oil that did
not qualify for that "new" oil. He noted that the $5 credit is
within DOR's fiscal forecast because, when looking at the
wellhead values in the Fall 2012 Revenue Forecast, "the oil is
going to fall within that $5 range", which is why there is not a
different number than the $5 number. If prices were to rise,
the value of that credit would drop and if prices were to fall
the value of that credit would increase.
3:07:01 PM
CO-CHAIR SADDLER surmised that if the $5 credit and the sliding
scale credit were broken into two lines, the line for the
sliding scale credit would be pretty empty.
MR. PAWLOWSKI concurred.
3:07:21 PM
MR. PAWLOWSKI, responding to Representative P. Wilson, confirmed
it is an either/or situation between the $5 credit and the
sliding scale credit.
3:07:42 PM
CO-CHAIR FEIGE observed from the line highlighted in yellow on
slide 18 that the total fiscal impact does not include potential
revenue impacts from increases in production. He surmised that
the areas that have the GVR applied to them are not considered
here because those would all have to be areas of new production.
MR. PAWLOWSKI replied correct and added that the fiscal impact
seen on slide 18 is based on if the bill passes and nothing
changes in terms of prices and production from the way DOR has
currently forecast the next five years.
3:08:38 PM
REPRESENTATIVE P. WILSON said she would like to see a comparison
between slide 18 and the price going up and the price going
down, given things could be different than the forecast. She
further asked that the comparison be provided in graph form
rather than chart form.
MR. PAWLOWSKI agreed to provide a comparison in graph form.
3:09:32 PM
REPRESENTATIVE JOHNSON asked whether it would be possible to
model an increase in barrels per day in steps of 5,000, 10,000,
15,000, and so forth to see what the fiscal impact would be of
adding new production.
MR. PAWLOWSKI responded DOR has tried to do a "scenario method"
in all of the fiscal notes rather than doing a fixed amount of
production per year. A reason for the scenario method is that
production goes up and then it comes down, and along with
production comes timing in investment. Thus, [in slides 19-25]
DOR has prepared graphs for three scenarios.
3:10:41 PM
REPRESENTATIVE SEATON commented that if in 2019 the scenario
[looks like that depicted on slide 18] the bill will have been a
failure because it would not have stimulated any new production.
MR. PAWLOWSKI concurred that if absolutely no change to
production happens the bill would be considered a failure. What
is seen [in slide 18] is the natural limitation of fiscal notes.
A dilemma of fiscal notes is that they are based on what the
revenue forecast is going forward and how it moves from that.
In front of the committee is something with a lot of moving
parts where increased production does have material impacts on
the state in the longer term. Thus, DOR wants to call attention
to the fact that this fiscal analysis, performed in the way
fiscal notes are typically done, by the nature of the fiscal
note is not allowed to directly include increased production.
CO-CHAIR FEIGE remarked it is "a conservative best guess".
3:12:26 PM
CO-CHAIR SADDLER pointed out for the public that this is a
fiscal note which is based on assumptions and formulas. It
would be nice to have various permutations in production and
price, but that would be tremendously awkward and difficult to
work with. He urged people not take this as gospel that this is
going to be the result; rather, it is a forecast possibility
under certain conditions and every future condition cannot be
predicted.
CO-CHAIR FEIGE added that not changing too many assumptions in
the fiscal note allows legislators to evaluate the fiscal impact
of changes that are made to the bill.
MR. PAWLOWSKI agreed and reminded members that [slide 18] is not
a fiscal note per se, but the elements that would go into a
fiscal note. He said DOR has tried to keep them consistent
through all the versions of the bill so comparisons can be made
of the various fiscal analyses.
CO-CHAIR FEIGE said he has asked DOR to provide a full and
complete fiscal note once the committee has reported a final
version of the bill.
3:13:49 PM
CO-CHAIR SADDLER requested the committee look at the [three
scenarios outlined on slides 19-25].
MR. PAWLOWSKI walked the committee through the three production
scenarios. Scenario A (slide 19) is the development of a new 50
million barrel field developed by a small producer with no tax
liability. The field has a peak production of 10,000 barrels a
day, development costs of about $500 million, and qualifies for
the GVR/GRE and the net operating loss carry forward credit.
Scenario B (slide 20) is the addition of four drill rigs in the
legacy units, each rig drills four wells a year, adding 4,000
barrels a day of new production, and each well declines at 15
percent per year, and the production does not qualify for the
GVR/GRE. Scenario C (slide 21) is the addition of a new drill
pad within a legacy unit, plus the four rigs working in Scenario
B. In this scenario 15,000 barrels a day are added in calendar
year 2014, increasing to a peak rate of 90,000 barrels a day in
2018, and the production would not qualify for the GVR/GRE. He
stressed that these are just scenarios and DOR is not saying
they are going to happen. They were done to illustrate the
ramp-up function of production; that production does not come on
all at once, but rather builds.
3:15:54 PM
MR. PAWLOWSKI, responding to Co-Chair Saddler, clarified that
Scenario A and Scenario B are each a stand-alone scenario, but
Scenario C is Scenario A plus Scenario B plus Scenario C.
3:16:19 PM
MR. PAWLOWSKI explained slide 22 is the projected revenues for
the various scenarios at an ANS price of $90. In the near term,
ACES generates more revenue, but in the future, as production
comes on line from those developments, Scenario B and Scenario C
start to exceed ACES. He stated DOR will be providing the
committee with the data behind this graph.
3:17:16 PM
MR. PAWLOWSKI noted a similar but more pronounced effect is seen
at an ANS price of $100 a barrel (slide 23). He clarified the Y
axis is in millions of dollars, so "$1,000" means $1 billion and
explained the comparison is between the proposed committee
substitute, HCS CSSB 21, Version B, and Scenarios A, B, and C to
show how much additional production the scenarios are adding to
existing production. He pointed out Scenario A does not add
material production - a small 50 million barrel field does not
move the needle much. However, Scenarios B and C show the
ability in the near term of the additional drill rigs and large
development pad to increase substantial production. He said DOR
was careful about saying that multiple fields would be built
from scratch within the first two years since that would be an
unrealistic expectation, but there is much potential for that to
happen in three to five years.
3:18:25 PM
MR. PAWLOWSKI moved to slide 24, pointing out the similar effect
in the near term at an ANS price of $120 per barrel, with the
high progressivity of ACES exceeding revenues under any of the
scenarios [for fiscal years 2014-2016]. However, [for fiscal
years 2018 and 2019], the additional production against the
forecasted decline exceeds the revenues forecast under ACES,
particularly under Scenario C.
3:19:15 PM
MR. PAWLOWSKI turned to slide 25, explaining that this graph is
at the forecast price in the [Fall 2012 Revenue Forecast] from
which the budgets and the planning are done on. A similar
situation is again seen where additional production allows the
revenues to increase over [ACES]. He reiterated that these are
scenarios, not predicted projects, so members can take a look at
the impact of production on the base system, something that is
not normally included in a fiscal note. When considering this
issue, it needs to be looked at in the context of what increased
production has an opportunity to bring to the state in terms of
longer-term revenues.
3:19:57 PM
CO-CHAIR FEIGE returned to slide 17 and pointed out that under
Version B the Oil and Gas Competitiveness Review Board would
provide a report to the legislature every four years, not an
annual report.
MR. PAWLOWSKI apologized for missing that.
3:21:14 PM
The committee took a brief at-ease.
3:21:47 PM
[CSSB 21(FIN) am(efd fld) was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES SB 21 Dan Donkel Testimony 4.1.13.pdf |
HRES 4/2/2013 9:00:00 AM |
SB 21 |
| HRES SB 21 Testimony Packet 1 4.1.13.pdf |
HRES 4/2/2013 9:00:00 AM |
SB 21 |
| HRES SB 21 Testimony Packet 2 4.1.13.pdf |
HRES 4/2/2013 9:00:00 AM |
SB 21 |
| HRES HCS CSSB21 Preliminary Fiscal Impact - DOR - 4.2.13.pdf |
HRES 4/2/2013 9:00:00 AM |
SB 21 |
| HRES HCSCSSB21 PFC Energy 4.2.13.pptx |
HRES 4/2/2013 9:00:00 AM |
SB 21 |
| HRES HCS CSSB21 EconOne 4.2.13.pdf |
HRES 4/2/2013 9:00:00 AM |
SB 21 |
| HRES HCS CSSB21 RDC 4.1.13.pdf |
HRES 4/2/2013 9:00:00 AM |
SB 21 |
| HRES HCS CSSB21 Walters 4.3.13.pdf |
HRES 4/2/2013 9:00:00 AM |
SB 21 |